Someone tell the FED, the QEs are not working!

Once again the FED expressed its view that it will continue “purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.” In the same time “the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent,…”.

Simply put the FED is telling us that will keep intervening directly in the fixed income market and will keep flooding the system with more money. Myself and less and less economists are worried that this is one of the worst disasters for market economics in the making. To be clear I do support loose monetary policy after a negative shock to production, but keeping it this loose for this long is dangerous. What is also dangerous is to have the arrogance to believe that you will be able to control the situation in the after running this type of monetary policy for so long.

Pro-government (intervention) economists will point to low inflation and tell me that all my worries are unfounded. Yes, CPI or PCE inflation has not exploded. BUT this is not why the FED is keeping monetary policy loose. The sole purpose of the FED’s QE program is economic growth. How has the economy responded after being drowned in cash? Well it has not.

The next shows the FED’s estimates for economic growth, years 2012 and 2013. I look at every FOMC meeting that publishes the forecasts for 2012 and 2013. As you can see, more and more money did not make the FED increase its short term or long term forecasts. Although the FED injected more liquidity new information made it adjust its forecasts lower. Simply put, even the FED has a hard time showing accelerating growth although it intervenes more and more. At this point even the latest FED estimate for 2012 looks too optimistic. But more troubling for everyone should be the estimate for 2013 which is falling again.


The biggest risk is now that the FED is so focused on delivering growth via loose money supply that is missing some other big imbalances(bubbles) building up in the economy.


6 thoughts on “Someone tell the FED, the QEs are not working!

  1. Contraargumentul este ca fara QE economia americana nu ar fi crescut nici atat cat a crescut. Dar desigur ca asta nu putem sti niciodata din moment ce nu ne putem intoarce inapoi sa vedem cum ar fi evoluat economia fara QE.

    Bernanke ar putea sustine insa ca efectul acestor politici monetare a fost ca bancile au fost incurajate sa dea credite, valoarea activelor financiare si nefinanciare a crescut ceea ce i-ar fi determinat pe detinatorii acestor active sa consume mai mult si sa acceseze noi credite pentru consum sau imobiliare.

  2. ceva “urat” trebuie sa se intample la un moment dat … se pare ca scanteia o sa fie in europa si nu la americani unde toata lumea s-a conformat cu situatia asta de QE-uri nesfarsite si aparenta stabilitate …

  3. Spot on. QE is a New Keynesian delusion.
    The Fed and its geniuses so revered here in Romania presided icer worse things that were created by market, ratehr than by the state so reviled by Mr. Catu. Disintermediation, securitization, and the rise of repo markets made funding cheaper and lending more plentiful, but it also made it more risky. Those risks were supposed to be controlled by financial derivatives and risk management tools, but instead these technologies seemed to amplify and spread, rather than reduce and control, the risk in the system. We were blinded to the possibility of crisis, with both regulators and the regulated accepting the logic of efficient markets, rational expectations, Ricardian equivalence and all the rest as description of the actual world rather than stylized theory about the world. As a result, the opaque but highly interdependent parts of this complex system combined with overconfidence in our ability to manage risk to produce a bust that the state decided it had to shoulder.
    When they reach the end of the rope with QE maybe they will have no choice but turn banks into public untilities.

    1. @Dan Suicu

      The state might be reviled Mr. Catu. On the other hand Mr. Citu just likes to spend his own money rather than let a public employee (or appointed former talking head) spend it for him. What Mr. Citu would love is for the current over-bloated state to do the few things it has to do well: independent justice system, rule of law and strive to deliver economic freedom.

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